Sunday, December 07, 2014

A small commentary on the exaggeration of the Bolivar collapse

For readers of this blog and other keen observers of Venezuelan reality, it has not passed without notice that the black market rate of the Venezuelan Bolivar (VEB) has taken a major dive in front of the America Dollar (USD).

The last time the VEB was below 100 to an USD was October 21, at 98,09. Thus we can calculate that the depreciation of the Venezuelan currency has been of (174.03-98.09)/174.03=43.6% in 51 days. That is, the currency has lost 43.6/51=0.7% per day. A staggering number by any mean.
I am not going to discuss here the consequences of that (for example, most car repair shops are already closing for the annual holiday because no one is selling them spare parts until there is some currency stability, just as my car has troubles). What I am going to try is to enlighten the reader in that inasmuch as it is true that the VEB has nose dived in two months, it is also true that the real fall may not be as bad as what Dolartoday claims. Which is not necessarily going to reassure you as you will find out (dolartoday itself suggests that, by pointing out "cash" transactions at a distant 157,41 on December 7).

Let's start by a concrete observation. Let's say that you have 100,000 VEB to trade for USD and you go to the Colombian border, at Cucuta, the only place where you can do this in the open. On December 7 you would have gotten 100,000/174.03=575 USD.

What can you do with 575 USD? Not that much. You cannot even travel to Miami from Caracas. If you live in the US, it does not pay you for a month of rent, not even a month of car lease if you need a solid family car. Heck, you may not even get three weekly grocery stores trips for your family if you eat more than macaroni and cheese.

What can you do with 100,000 VEB? More. You cannot afford a car whatsoever (nobody really except those in non kosher businesses, but that is another issue). However you can feed your family for a full month and more (assuming that you find what you are looking for, another story too). You can have your home repainted. Even in Caracas you may be able to pay 2 or 3 months rent.

My point here is that I, for one, not only cannot afford the 174 rate but even if I could I probably would not, preferring to go out and buy whatever I can, to resell it later as the crisis moves along. That is, I would but at that rate if there were a true immediate life threatening problem (as for a crucial medicine for my S.O.)

I know that you cannot truly compare Venezuelan acquisitive capacity with any other country holding more rational economic principles. There are so many distortions here that it makes such a comparison an end game. Still, 100,000 VEB is more, in concrete terms, than 567 USD. I personally think that if we distance ourselves somehow from the craziness of the regime, assuming that it is directed at their lumpen while they decide what to do, 100 VEB to 1 USD is closer to the truth. What gives? The Cucuta clientele.

See, folks tend to forget one thing: people exchanging dollars like crazy at the Colombian border are not your average Venezuelan (note: as far as I know at Cucuta you can get the exchange rate du jour at different places but you cannot get truly how much is being exchanged; correct me if I am wrong). The people that exchange in Cucuta are in large part people laundering their money; contraband, assorted smuggling, guerrilla extortion, drug dealing, local public employees skimming, and what not. These people are much more willing to exchange at any rate if the political winds are unfavorable, if there is not much to buy inside the Venezuelan border, if oil prices drop too much for their taste.

But political people, from whoever holds dolartoday to the regime main thugs and opposition politicians, passing through manipulative local bankers and traders, find it most convenient for their agenda to support that Cucuta exchange. Then again the regime helps along by keeping up an unreasonable control exchange and not publishing truthful data that would conform the explicit value of the VEB in regards to the USD (reserves / circulating money) that dolartoday itself places at 86.67 on December 7 ("implicito").

Meanwhile, as all of this circus keeps going on, the little money saver, the small business guy, does not know what to do, does not know what to buy, does not know what price to sell, thus feeding the inflationary spiral. In the end, from crooked politician to small guy, we will all get screwed (though of course the thugs will fare better).

My advice? Do not buy dollars right now, wait for an official devaluation that cannot be long in coming. Go out and buy whatever it is you can find to buy, from canned goods to linen. And sit tight on them. You are going to need them next year.

PS: Of course, all of this may become wishful thinking in a month from now when the black market reaches 200 or 300... I am assuming that the regime will try to cut its expenses somewhat because if not we are on the way to Germany circa early 20ies of last century... And no regime survives that.

27 comments:

If someone has Bolivares to spare, he is definitely better off stuffing his mattress with dollars rather than his pantry with sardine cans. It will help him more down the line. He does not have to go to the border either. There is an active market within the larger cities.

Yes and no. In cities you need to do transfers and such stuff. Buying cash is dangerous in that you can get scammed through counterfeits, robberies, etc... In Cucuta you get cold cash.

Also, certainly, if you have lots of dollars, preferably from shady deals, why not? But if you are average Joe, with hard earned savings of 100, maybe 200 K VEB, is it really a good deal RIGHT NOW to buy a thousand dollars that you can go nowhere with? If you are stuck in this country, a pantry full of sardines is better for next year than 1000 USD under your mattress. No?

Daniel please stop comparing to the US. My cousin was robbed at gunpoint this morning in Margherita by four motorcyclists, and we don't have to worry about that while eating very well on $575 a month, with a selection of 12 brands of macaroni and cheese from a hundred different stores, and not a one with fingerprints, a security guard nor a line.

Sorry to tell you but a week ago a friend sold $ at 159 easily. Several people wanted to buy it.He received more than 10 calls. I guess by now it will be at 174. He needed Bs to pay a debt in Venezuela.He was planing to pay the debt on September, but by paying on December he saved more than 70% or $5000. That is what I call a Christmas gift by Maduro.

Again, there is a difference in paying up to 5000. That is not what truly drives the price up. What makes the difference is people trying to get 10, 20, 50 K of dollars.... At 5000 savings I can guess that the guy was selling well into that range.

Now, the question is why is your friend buying VEB? In that amount anyway. Because I also now plenty of retired or semi retired people that have no trouble selling a few hundred USD a month to live comfortably in Caracas.

Inheritance taxes....and to make things much better, he sold the house in September and immediately bought $ (at 80 or 90). The better part is that he lives outside of Venezuela so he does not have to suffer any hardship with the $ going to 300 or the new " Weimarer Republik.""tronco e negocio"

Daniel as an economist I must point out that your depreciation calculation of the VEB to the USD is wrong. You calculated "(174.03-98.09)/174.03=43.6% in 51 days", the proper calculation is (174.03-98.09)/98.09=77.4% in 51 days. When the VEB hits 196.18 it would have depreciated 100% to the USD.

Of course it can lose more than 100%. You need to understand that this is just a cross between VEB and USD. There is a compound tail wind affect hear since USD as a whole has been strengthening and VEB is weakening.

As for the price of VEB, what is listed on dolartoday isn't necessarily realistic. We send money south each month and aren't getting the posted rates as an exchange. They have gone up for sure but they definitely aren't 174.

Buying either tins of food or dollars is the same thing. Both are a good idea. Both protect against devaluation / inflation. It is not that you would use the dollars, but in one year when you need to spend the money in VEB, you just convert the dollars back to VEB. You will receive a lot more VEB then if you had held VEB the entire time.

The current 1 year yield on US debt is 0.65% for 2 year term.

That is incredible low, a sign that folks think a dollar will HOLD it's value over time.

The 170 number if incredible, but you make a good point about the people who are in that part of the market. It is an extreme. But a year of lower oil prices will also have an impact.

Secondly, the collapse of the economy does not mean a collapse of the ability to hold power, many countries have had major collapses without political change.

Fascist dictatorships can hold surprising well. Look at Cuba, rojipardos as they call them these days. When you have enough people willing to kill so as to retain their privileges and illusion of power, the deadline is always pushed. Well, up to a point. Even Qadafy fell and who would have guessed it a year earlier!?

Cuba was heavily supported by USSR because of their proximity to the US during the cold war. They were circling the drain when uncle Castro came across a naive, ambitious Chavez with a huge oil trust fund. Now all that remains is rearranging the chairs on the deck of the Titanic.

You already hit on one problem with your idea about waiting for the government to officially revalue the currency before trading your cash for dollars... That is what if they don't revalue the currency right away? What if the problems continue to get worse and then Venezuela defaults? I agree with you that the best thing to do is revalue the currency sooner rather than later. But it is I think difficult given the current political problems in Venezuela. They should have already increased the price of gasoline and diesel in order to curtail smuggling but they have not done that.

If current ways continue at some point there will be no private businesses outside the gov't channels and no one left with wealth. At that point it will be tougher to find anyone wanting USD. To date people still have enough to need USD but if the gov't with its lack of wealth gets very repressive which it will have to then it will reach this point. Anyone connected to the gov't will be able to access USD through it and will not require private exchange. I believe this gov't will become very repressive but will topple as so many have that reached the point of dictator in Venezuela. With experts saying we may reach mid 40s for crude in mid 2015 as the middle east looks to break many drillers around the world, I think sooner then later this gov't topples. Hopefully a good leader arises and oil rebounds such that the country can recover.

I tend to agree with Daniel, if you have a choice buy goodies and store them. But this brings a risk, the regime may start searching homes for hoarding (don't firget the regime is run by cuban advisors). And hoarding could land you in a tight spot. My first choice would be to leave the country. But if you have to stay try some hoarding, buy dollars, and make sure all your passports and legal papers are scanned and put in a safe cloud somewhere outside venezuela.

I do not think we need to worry much about home hoarding. Let's say that with end of years bonuses the average Juan Bimba has 200.000 VEB. If a liter of olive oil sets you back 1.100 (if you can find it), a bag of a pound of skim powder milk 300 (if you can find it), a can of decent tuna at 150, etc, etc... The best you can do is fill up your kitchen cabinets for 3-4 months "helper" foods, those that you will add to corn meal and pasta which I suppose that the regime will manage somehow to keep providing; otherwise.....

This is one of the best articles to reflect my position on the current situation. http://ca.reuters.com/article/topNews/idCAKBN0JO1C820141210?pageNumber=3&virtualBrandChannel=0&sp=trueTo me it shows how the time for Maduro is very limited and with oil down he will not survive the coming next year or 2. But it also clearly shows the damage that Lopez and Maria do every time they speak up to any opposition. How their mere presence causes the the poor to turn against the opposition and support Maduro.

The situation is confounding. It's hard to tell what is reality and what is exaggeration. In these situations there are those who are trapped in a state of denial, and those who are panniced and caught in a stampede! My gut tells me to pannic!

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